Ecuador defaults on foreign debts

President calls for restructuring of debts he says were contracted illegally.

13 Dec 2008 12:40 GMT

Correa says much of the country's foreign debt is "immoral and illegitimate" [AFP]

Correa originally said Ecuador might default on some of its $10bn in foreign debts before his election victory in 2006, and more recently the president warned that falling oil prices would make the move increasingly likely.

Wrongdoing

A presidential commission last month recommended that Ecuador default on almost 40 per cent of foreign debt, accusing former officials and bankers of profiting irresponsibly from bond deals.

The report accused former Ecuadorean officials and investment banks, including US-based JP Morgan and Salomon Smith Barney, now part of Citigroup, of mishandling debt restructuring in 2000, when the country's banking system collapsed, and 2005.

Officials involved in the deals have denied any wrongdoing.

Correa has also said that two sets of bonds, due in 2012 and 2030, were issued without presidential authorisation and dates on the documents were altered.

The president is now expected to offer bond holders a tough restructuring deal that reduces the value of the bonds by as much as 60 per cent.

Isolation

It was the third time in 14 years that Ecuador had defaulted on a payment and the move could effect its access to credit as it confronts a budget shortfall caused by the falling oil price.

"They were already sort of headed into isolation. Essentially now they've drawn shut the gate,'' Enrique Alvarez, head of research for Latin America Financial Markets at IDEAglobal in New York, said.

"If oil prices continue to descend or even if they stabilise, this means Mr Correa domestically is going to have a very tough time in upkeeping the current level of expenditures."

Oil finances 40 per cent of the national budget and the government under Correa has spent heavily on social progammes, such as support for single mothers, buying seeds for farmers and providing building material for new homeowners.

Ecuador says it has worked to shield itself from fallout from the default by securing a $1 billion credit line from the Andean Development Bank and talking to allies, such as Iran, about possible loans.